Gravel2Gavel Construction & Real Estate Law Blog

Illinois and California appellate courts recently issued two policy-holder favorable decisions. In both cases, the trial court had granted summary judgment in favor of the insurance company and denying coverage, and in both cases the trial court decisions were reversed.

In the Illinois case, Patrick Engineering, Inc. v. Old Republic General Insurance Co. — N.E.2d —, 2012 WL 3010344, Ill.App.2 Dist, July 20, 2012 [not yet released for publication], an engineering firm entered into a consulting agreement with an electric utility. As required by the agreement, the engineer procured a CGL policy naming the utility as an additional insured. The policy’s professional services exclusion excluded coverage for property damage “arising out of the rendering or failure to render” engineering services.

While working on a project designed by the engineer, the utility damaged the sewers of a local municipality, which then sued the utility on a negligence theory. The utility tendered its defense to the insurer, which rejected the tender, denying coverage based on the policy’s professional services exclusion. In a subsequent lawsuit filed by the engineer and utility to determine coverage, the insurer argued that because the damage arose out of the engineer’s services, the professional services exclusion operated to bar coverage both for the named insured engineer and the additional insured utility–even though all parties agreed that the utility did not perform any engineering services. The trial court granted summary judgment in favor of the insurer.

On appeal, the court found coverage by analyzing the interplay of the policy’s additional insured endorsement, professional services exclusion, and separation-of-insureds clause. The additional insured endorsement provided that an “Insured” included the listed additional insured if liability arose in whole or in part out of the engineer’s work. The separation-of-insureds clause provided that the insurance applied separately to each insured. The appellate court agreed with the utility that it could rely on the “arising out of” language in the additional insured endorsement to claim status as an additional insured, and that the separation-of-insureds clause then provided coverage to the utility despite the professional services exclusion because the utility had not performed professional services. In other words, the fact that the named insured performed professional services did not trigger that exclusion for the additional insured.

In the California case, Travelers Property Casualty Co. of America v. Charlotte Russe Holdings, Inc. — Cal.Rptr.3d —, 2012 WL 2356477, 2d App. Dist., June 21, 2012 [ordered published July 13, 2012], a manufacturer of high-end apparel entered into an exclusive sales agreement with a clothing store. The manufacturer subsequently sued the store, alleging that the store’s sale of the high-end apparel at deeply discounted prices harmed the apparel brand.

The store tendered its defense to its insurer under its CGL policy, which provided coverage for both personal and advertising injury, and required defense of any suit seeking damages for those injuries. The personal injury coverage extended to offenses arising out of the business (but not advertising). The advertising injury coverage extended to offense committed in the course of advertising the business, but excluded injuries arising from breach of contract. The personal injury coverage contained no such exclusion. Both provided coverage for claims alleging injury from disparagement of goods.

The insurer declined to either indemnify or defend, on the basis that a reduction in price of a good is not disparagement of that good. The insurer filed a declaratory relief action to determine that it owed no duty to defend or indemnify. In support of its motion for summary judgment, the insurer argued that California law equated disparagement with trade libel, requiring a false statement and resulting loss of business. The trial court found for the insurer.

On appeal, the court found that the allegations of injury to the apparel brand by offering the brand at a low price could reasonably be interpreted as disparagement of that brand, and that therefore the claims were potentially covered by the personal injury coverage of the policy. The court reached this result by noting that California law permitted disparagement by implication, and that disparagement claims were not required to be expressly stated as disparagement or trade libel. The court disagreed with the insurer that a disparagement claim required the allegation of trade libel, but noted that even if it did, the selling of a high-end product at discounted prices could be construed as an implied false statement by the seller that the high-end product was not, in fact, high-end.

Because the court found coverage under personal injury, it avoided deciding whether coverage would have been available under advertising injury, and thus did not reach the potentially thornier issue of whether the breach of contract exclusion would have excluded coverage when no breach of contract was proven since the underlying litigation had settled.

It is the rule in many jurisdictions that an insurer which assumes defense of its insured without issuing a reservation of rights can be estopped from later denying coverage based on rights or defenses in the insurance contract. This general rule was rejected by the Supreme Court of Wisconsin in Maxwell v. Hartford Union High School District, 814 N.W.2d 484 (Wis. 2012). The court in Maxwell held that an insurer which defends without reserving the right to deny coverage has not waived its ability to rely on coverage clauses in the policy allowing for such a denial.

In Maxwell, the policyholder – a school district facing a wrongful termination suit from an ex-employee – tendered a claim to its liability insurer which defended the school district in the ensuing litigation without issuing a reservation of rights letter. It was not until a judgment in excess of $100,000 was awarded against the school district that the insurer denied coverage based on language in the policy excluding liability for damages due under the employment agreement and for lost benefits or lost wages. That the policy indeed excluded coverage for the damages at issue was not in dispute. The issue presented to the court was whether, because the insurer failed to issue a reservation of rights, it had waived or could be estopped from asserting its defense of no coverage. In rendering its decision, the court held that waiver or estopped could not supply coverage to an insured that was not provided in the policy itself. Ruling otherwise, the court stated, would force an insured to pay for a loss for which it had not received a premium.

The court clarified that waiver or estoppel did not apply to the present case because it involved a coverage clause, as opposed to a forfeiture clause (such as a notice or cooperation clause). It noted that an insurer must act timely on a forfeiture defense and stated that providing a defense may be grounds for establishing waiver or estoppel regarding a forfeiture clause where the insurer fails to issue a reservation of rights. The court also made clear that its decision did not limit the damages applicable to an insurer which breaches its duty of good faith toward its insured. Such an insurer is liable for all damages resulting from its breach, and is not limited to damages contemplated by the contract.

The Maxwell court emphasized the importance of communication between insurers and insureds. Indeed, after Maxwell, policyholders should have increased motivation to engage in clear, detailed communications with their insurer regarding the insurer’s coverage position prior to entrusting the insurer with defense of a claim. If a policyholder cannot rely on a reservation of rights letter to explain the scope and limits of an insurer’s coverage position, it must seek such information through other means.

The First Circuit has endorsed key principles that favor policyholders in insurance coverage disputes — principles that can frequently be used to help insureds in construction cases. So, this new case is worth a look. In Oxford Aviation, Inc. v. Global Aero., Inc., 2012 U.S. App. LEXIS 10101 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit vacated the district court’s decision which found that a carrier had no duty to defend claims involving alleged faulty workmanship. Relying on Maine law, the court held strong to the concept that even the remotest possibility of coverage triggers an insurer’s duty to defend.

The details, after the jump.

Airlarr hired Oxford to perform repairs and installations on its airplane. After picking up its restored plane, Airlarr sued Oxford for breach of contract, breach of express and implied warranties and various state-law claims. Airlarr alleged that, due to Oxford’s “negligence and faulty performance,” one of the plane’s side windows cracked on Airlarr’s flight home from Oxford’s Maine facility. Airlarr also listed a number of “defects and other substandard work,” including uncomfortable seats, leaking fuel injectors, a cracked turbocharger, and an improperly installed carpet. But the cracked window was central to the Court’s decision to overturn the district court’s ruling.

Oxford tendered the complaint to its CGL insurer, Global Aerospace, and requested that the insurer provide a defense. But Global disclaimed both coverage and its duty to defend Oxford in the Airlarr lawsuit. Oxford then sued Global in a Maine state court, and Global removed the case to federal district court. The district court granted summary judgment in favor of Global, holding that Global had no duty to defend because Airlarr’s claims fell within the CGL policy’s exclusions. The First Circuit disagreed and held that the district court should have considered the issue of initial coverage instead of relying solely on the policy’s exclusions.

Recognizing that Maine interprets coverage terms like “accident” and “occurrence” broadly – as opposed to courts that rely on these terms to exclude coverage for faulty workmanship – the First Circuit concluded that the damage to the plane’s side window should be considered an “accident” and an “occurrence” and be covered under Coverage A of the policy. The court, therefore, did not interpret these terms narrowly to exclude coverage for faulty workmanship.

The court reiterated the basic principle that an insurer’s duty to defend is generally broader than its duty to indemnify. The court insisted that an insurer has a duty to defend even if the possibility of coverage is highly unlikely. After discussing the exclusions that Global relied on, the court concluded that, because the policy covers at least one of Airlarr’s claims, Global has a duty to defend the entire lawsuit: “Here, at least one scenario relating to the cracked window, occurring in flight and away from Oxford’s facilities, does fall within coverage and could plausibly avoid all cited exclusions.”

To determine whether any exclusion could negate the policy’s coverage of the damaged window, the court analyzed possible exclusions. The court held that exclusion (j)(4), which excludes from coverage “[p]roperty damage to … [p]ersonal property in the care, custody or control of the insured,” did not exclude the damaged window because the damage occurred after Oxford returned the plane to Airlarr. Additionally, in discussing exclusion (j)(6) (the “your-work” exclusion), which excludes a “particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it,” the court noted that this exclusion could conceivably apply to the damaged window. However, by its terms, the your-work exclusion does not apply to “property damage occurring away from premises you own or rent and arising out of your product or your work.” Because the damage to the window occurred in-flight and in Airlarr’s possession, the court concluded that the your-work exclusion did not exclude coverage of the cracked window.

The court quickly dismissed exclusion k (the “your-product” exclusion), which excludes “[p]roperty damage to your product arising out of it or any part of it,” since the cracked window was never alleged to be Oxford’s product.

The court also discussed exclusion l (the “products-completed operations hazard” exclusion), which excludes “[p]roperty damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” The court noted, however, that the damaged window was not alleged to be, nor was there any indication that it was included in, Oxford’s work. Therefore, this exclusion also could not apply to the damaged window.

In concluding that the policy’s exclusions could not exclude coverage for the damaged window, the court held that Global had a duty to defend even though Global would likely be on the hook for little, if any, indemnification if Airlarr prevailed in the lawsuit: “If Airlarr proves its case, it seems unlikely that there will be much, if any, indemnification since most of the claimed injuries appear likely to be covered by exclusions. But the duty to defend is triggered by any realistic possibility of any damage that might be within coverage and outside the exclusions and the damaged window creates that prospect.” Notwithstanding the exclusions, therefore, the court held that Global had a duty to defend.